Welcome to AutoNation's Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to Andrew Wamser, Treasurer and Vice President of Finance for AutoNation. Sir, you may now begin.

Thank you, operator, and good morning. And welcome to AutoNation's second quarter 2017 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman, CEO and President; Lance Iserman, our EVP of Sales and Chief Operating Officer; Scott Arnold, our EVP of Customer Care and Brand Extensions; and Cheryl Miller, our Chief Financial Officer. Following their remarks, we will open up the call for questions. Robert Quartaro and I will also be available by phone following the call to address any additional questions that you may have. Before we begin, let me read a brief statement regarding forward-looking comments. Certain statements and information on this call constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the actual results or performance to differ materially from such forward-looking statements. Additional discussions or factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. And now, I'll turn the call over to our AutoNation's Chairman, CEO and President, Mike Jackson. Mike?

Thank you, Andrew. Second quarter 2017 presented a challenging market especially in Florida and Texas where we are over weighted. Those two states encompass 45% of AutoNation's business. Our unit volume declined 6%. According to J.D. Power, industry new unit sales in these two states were down 5%. Texas has been difficult since the precipitous drop in oil prices in the second half of 2014. Difficulties in Florida during the quarter appeared to already be stabilizing. Our pre-owned margins declined due to implementation challenges with our centralized One Price strategy during the quarter. However, we've taken decisive action to resolve those issues by realigning our leadership and structure to fully realize the opportunity of our brand extension strategy. To meet this challenge and achieve all the ultimate benefits of brand extension, we made structural change. We now have an Executive VP responsible for all customer care and its brand extensions and an Executive VP for Sales and Field Operations. Scott Arnold was promoted to Executive VP, Customer Care and leads all our efforts in existing customer care, and all our customer care and brand extension initiatives. These initiatives are all on track. All pilots to validate pricing have been successful, customer acceptance of AutoNation parts has been exceptional. In 2018, we confirmed that we expect to achieve $100 million of incremental growth in customer care on these brand extensions. Lance Iserman, who was the Western Regional President for us, was promoted to Executive VP Sales and Chief Operating Officer. Lance led the implementation of our One Price on the West Coast and did an excellent job. We are now on our way to resolving this issue. While challenges still exist in the marketplace, especially new vehicles, we now have the correct structure and leadership to realize the opportunities we have. We've built a great brand, we have scale, and we have innovative technology, and we'll realize the opportunities that have been created by these capabilities. I now turn the call over to Lance, our Executive VP of Sales and Chief Operating Officer.

Thanks, Mike, and good morning. AutoNation continues to make significant progress with its comprehensive brand extension strategy. In the second quarter, we opened our first two AutoNation USA stores in Houston and Corpus Christi. Additionally, in the quarter, we opened two auctions in Orlando, Florida and Houston, Texas. Scott will give an update on branded parts, accessories, and our collision business. Today, we announced the acquisition of Alpine Jaguar in Ft. Lauderdale, Florida, representing approximately $68 million in annual revenue. This is our first Jaguar franchise in South Florida. We also announced that we're awarded the Land Rover Jaguar add-point in Delray Beach, Florida with anticipated annual revenue of approximately $130 million once fully operational. This add-point together with our BMW add-point, previously announced in October, will complete our Premium Luxury automotive row in Delray Beach, Florida, which also includes our Mercedes-Benz of Delray store. On a combined basis, once the add-points are fully operational, we expect that our Premium Luxury stores in Delray Beach, Florida will generate approximately $500 million in annual revenue. As Mike mentioned, we have completed the rollout of our One Price negotiation-free pre-owned pricing strategy in all of our stores. While all facets of shifting to a new selling strategy are important, in the Western region, we narrowed our focus to three key areas, training, adoption, and change management. Change management was the most critical as negotiated price environment is a legacy part of the automotive retail industry. And with our digital and brand extension investments, we are committed to transforming the future state of automotive retail. Changing this culture for associates and customers was an integral part of the success of One Price in the Western region, which produced an increase in used retail vehicle unit sales. We are working diligently to replicate these results across the Central and Eastern regions. We remain committed to finding the optimal balance between margin and volume as it relates to our One Price strategy. Now I'll turn the call to Scott Arnold, our Executive Vice President of Customer Care and Brand Extensions.

Thank you, Lance, and good morning, everyone. I'll provide an update on our brand extension initiatives and customer care, but first I'll share a few key metrics for the quarter. My comments will be on a same store basis as compared to the prior year. Customer care revenue for the quarter was $842 million, an increase of $27 million or 3%. Also in the quarter, customer care gross profit was $371 million, an increase of $18 million or 5%, reflecting the year-over-year increase in margins. Customer-pay gross was $152 million, up 4% year-over-year. Warranty gross was $80 million, up 14%. And collision gross was $32 million, up 4%. We continued to move forward with our comprehensive brand extension strategy. Since January 1, 2017, we've acquired three collision centers; Alpine Collision Center in Ft. Lauderdale, Florida; Bellevue Auto Rebuild in Bellevue, Washington; and Lewisville Collision Center in Lewisville, Texas. We currently own and operate 72 AutoNation collision centers from coast to coast. New customer care revenue streams, AutoNation branded parts – Precision Parts and Auto Gear remain on track, with multiple parts categories expected to be available by year end. Precision Parts supports our collision network, our wholesale efforts, and reconditioning in our pre-owned vehicle business. Precision Parts creates the opportunity for AutoNation to reduce its overall reconditioning cost in our newly implemented One Price environment. Auto Gear offerings will bring us into the nearly $40 billion aftermarket accessory world, where franchise dealers traditionally have had extremely low participation rates with limited offerings. We anticipate that our branded parts initiative will contribute $100 million in incremental gross profit in 2018. I'll now turn the call to Cheryl Miller, our Chief Financial Officer.

Thank you, Scott, and good morning, ladies and gentlemen. In the second quarter, revenue declined $162 million or 3% compared to the prior year and gross profit declined $16 million or 2%. SG&A as a percentage of gross profit was 74% for the quarter, which represent a 450 basis point increase compared to the year ago period, due to pressure on gross profit, as well as investments related to our brand expansion strategy. We expect SG&A as a percentage of gross profit to remain elevated through the second half of 2017 that would may improve from the second quarter level due to seasonality and the ramp-up of AutoNation Precision Parts. The provision for income tax in the quarter was $57 million or 39.5%. The treatment of share-based awards under the newly adopted accounting standard update increased the tax rate for the second quarter by 100 basis points. As a reminder, this new treatment is likely to cause some volatility in our effective tax rate in future periods. At the end of June, we had $2.6 billion of non-vehicle debt, an increase of $22 million compared to March 31, 2017. Our non-vehicle debt fixed to floating mix was approximately 69% fixed and 31% floating. Non-vehicle interest expense increased slightly to $29.2 million compared to $28.7 million in the second quarter of 2016, driven by an increase in capital leases due to acquisitions and higher interest rates. Other operating income was $20.7 million in the second quarter of 2017 compared to $5.8 million in the prior year. Other operating income included a year-over-year increase in gains of $7.7 million related to divestitures and a decrease in asset impairments of $7 million. AutoNation has approximately $264 million of remaining board authorization for share repurchase. As of July 31, there were approximately 100 million shares outstanding. This does not include the dilutive impact of stock options. Our leverage ratio increased to 2.7 times at the end of Q2 as compared to 2.6 times at the end of Q1. The leverage ratio is 2.6 times on a net debt basis including used floorplans and our covenant limit is 3.75 times. Capital expenditures were $63 million for the quarter. Capital expenditures are on accrual basis, excluding operating lease buy-outs and related asset sales. Our quarter-end cash balance was $53 million, which combined with our additional borrowing capacity resulted in total liquidity of $1 billion at the end of June. In addition to our available liquidity and select asset sales, we continue to generate strong cash flow led by our customer care business. We see significant opportunity to generate value by investing in our brand extension initiative as well as through opportunistic share repurchases and acquisitions. I'll now turn the call over to our Chairman, Chief Executive Officer and President, Mike Jackson.

Thank you, Cheryl. We're now delighted to take your questions.

Thank you. Our first question will be from the line of Mike Levin from Deutsche Bank. Sir, your line is now open.

Morning, guys.

Morning.

I was hoping you could kind of discuss the challenges in One Price in a little bit more detail. Is this something that's really more of an issue with employees not getting on to the program and kind of accepting it, or is there an issue with doing One Price at a franchise dealer where it's hard to respond to OEM incentives that are maybe on the same model there, and that this is really more something that succeeds at a standalone store or just anything you can provide on that front?

Yeah, I think the – Lance can talk about some of the issues at the store level. I think we also had issues at the centralized pricing level, trying to find the optimal line between price and volume. At times, we were priced too low and volume went up precipitously and when we tried to balance that out, of course you have to restock, which then shifts the mix to having to buy more from auction which raises your cost. That then squeezes your margin from the other end. So, there was some issues with how we priced centrally, which are pretty much resolved and behind us. And then, there are some cultural issues at the store. Lance, why don't you talk about those.

Yeah. Thanks, Mike. So the cultural issues in the store is we have centralized appraising and pricing, and so there is a communication effort that needs to take place between the managers within the store and the pricing and appraisal team. So that's the first big shift of what needs to happen. So sometimes there leads to obstacles in that, we feel like we have that figured out now. And then also just the legacy of having a typical negotiating environment in a franchise store and getting our associates trained with the word tracks. And then really our customers also trained and understanding what we're about, and how we price our cars, and those types of things, so...

So this is Mike. This is Mike Jackson, again. I think the conclusion that I came to in going through this issue was we have a very ambitious agenda, both on the variable sales side of the business with our brand extension including the attribute of One Price. And Scott's already talked about this very comprehensive and compelling brand extension on the customer care side. I came to the conclusion that the span of the ambition required a different structure, namely, that I needed an Executive Vice President solely focused on customer care, and all the skill sets that are required to go in this very creative, innovative, ambitious new way. And on the sales side, it's a monumental challenge to implement One Price in a traditional environment, where we're still selling new vehicles, in a negotiated style, and finding the line for compatibility and running everything from a central pricing system. That is very ambitious and required a single focus, hence, an Executive VP for Sales and Field Operations, and a Chief Operating Officer. So, that was very much part of the decision in the second quarter to split the responsibility, elevate two leaders with in-depth expertise in each one of those fields separately.

Got it. I mean, just to confirm, is your sense that you've kind of worked through these issues and we should see kind of improvement in margins in the used business moving forward or you kind of feel there's probably still some learnings to have there?

I think to get to our ultimate ambition for margins, I think, takes the rest of the year, but you will see improvement in the third quarter.

Great. And maybe just a bigger picture question – we've seen Avis partner with Waymo on maybe doing some fleet management for autonomous and automakers have highlighted their dealer base as kind of a potential advantage and having that distribution network. Have you guys kind of thought at all about doing any fleet management in the autonomous future as a potential brand extension, and just put any capabilities that you might have now and how you might work that forward?

Yeah, I think that is an interesting opportunity.

Okay. Well, I look forward to knowing more about it in the future. Thanks, guys.

Thank you. Our next question will be from the line of Chris Bottiglieri from Wolfe Research. Sir, your like is now open.

Good morning. Thanks for taking the question. This is actually Jake Moser on for Chris. So one of your peers had talked recently about exiting out of the standalone used car business and they specifically cited concerns around subprime and lack of just having a captive finance arm? We see like your wholesale and your parts and service strategies as essential pieces of that puzzle, but do you think you would add a captive finance arm as a critical piece on that list as well and maybe just some thoughts on why or why not?

Yes, you're very right, that we have a very comprehensive approach to the pre-owned business. My view is that the new vehicle business faces headwinds both from a volume point of view and a gross margin point of view. It is absolutely dominated – that market is absolutely dominated by the manufacturers, production goals and a push system and the incentives to go with it. Hence, our brand extension strategy where we will move into fields of business where we can control our future and our destiny with the ambition that we can – that we're in control of growing this company both from a revenue point of view and a profit point of view. And don't get me wrong, we will still run the play the manufacturers call. I have given up on trying to change them. I have capitulated there, it is what it is and I can't change it, so we'll run the play aggressively for new vehicles but I know that is not going to lead to greater profitability for AutoNation. So, hence, our brand extension strategy. When it comes to pre-owned and the extension into the USA stores, so this is a overarching approach where it's one brand including the franchise business and the extension into the USA stores, all with a One Price system. So, very challenging complex to create as we talked about but I think it will be very compelling once we successfully implement it. Yes, absolutely, AutoNation parts and AutoNation accessories are crucial to being able to do higher volume with better margins with lower reconditioning costs and still put a frontline outstanding vehicle. Knowledge of the marketplace for our pricing system including the auctions needs to be there. So, I think we have it pretty well thought through. Now, we have relationships with over 200 lenders, including some excellent subprime lenders with whom we have long-term relationships and approach the business in a very disciplined way. So, we have no intention of a brand extension into subprime lending, or any lending whatsoever. I do not consider that a core competency of AutoNation and I do not consider it as a place where our capital should be applied, I like the system where we are paid a fee to originate the loan and it's an arm's length decision without contingency as to the approval of the loan.

Got it, that's helpful. And obviously it's still early, but you aren't seeing any signs of difficulty that they might have been suggesting along those lines in subprime?

Say it again, now.

Obviously it's still early on, but you're not seeing any sort of the difficulties that they may have been suggesting in the subprime space?

No. I mean, there are some – there are a few subprime players who went too far too fast and they'll have to pay their dues for that, but we're in a good shape with our lenders.

Okay. Thanks for taking the questions, and good luck.

Thank you.

Thank you. Our next question will be from the line of Bret Jordan from Jefferies. Sir, your line is now open.

Hi. Good morning, guys.

Good morning.

On the AutoNation USA, obviously just a couple of stores open, but could you talk about the inventory sourcing, how much is either a distributed from AutoNation franchise, just units or auction or how much is just bought off the street. And then the follow-up on that I guess again, maybe pretty limited history so far, but how does this customer pay service in the AutoNation USA working and, I guess on a comparable service basis, how does pricing compare to that offer at the franchise level?

So, Lance, if you could take the question on where and how we're going to source inventory for the USA stores.

Sure. Absolutely.

And talk about how customer care is going to develop at the USA stores.

Okay. Absolutely. So we've developed We'll Buy Your Car events and they – we've had two successful events in the Houston store and we have bought very good quality vehicles from that. So we feel like going forward that is a good source for us in our franchise stores. 75% of our inventory in used comes from trades, 15% from auctions, and about 10% off lease, so obviously we won't have the off-lease business but we intend to implement the one – We'll Buy Your Car and we'll expand that as we go forward. So currently, our inventory is a mix of auction purchases, vehicles from our franchise stores, and our We'll Buy Your Car event and that will be less dependent on our franchise stores as we move forward.

Okay.

And this is Scott Arnold on the Service Now portion of our USA locations are really two streams coming into support our service operations there. One is the customers buying the used vehicles from our USA stores where we have a two-year maintenance and we'll keep that customer retained to the Service Now operations as well as them offering an aftermarket type environment with full Precision Parts where we retain the customer if the customer is not going to go to a dealership, we'll retain them in the Service Now operations.

Okay. What's the – how is the aftermarket pricing compared to the dealership pricing?

Well, it's completely different product offering in those stores from the OE parts, so it's Precision Parts only, so the pricing will be competitive with aftermarket, but balanced against our franchise operations as well.

Okay. And I guess in Precision Parts, how broad are you going in inventory there? I mean, I guess as you think about inventory investment and inventory turns in some of those categories, are you going to be going as broad as starter motors and internal engine components, traditional mechanical parts or are you really trying to limit that with the commodity higher volume?

I would say in the beginning it's commodity higher volume, but that we have setup logistics, so that we can have those parts within 15 to 20 minutes and as we buildup parts movements, then we will stock accordingly.

Are those your own logistics or you're going to outsource that 15 to 20 minute availability?

Combination of the two.

Okay. And I guess as you think about inventory investment, I mean, if we're looking down the road a couple of years, how would we think about the working capital commitment to Precision Parts?

At this point in time, we're looking at – we need to get movement and run rates out there, but we don't see capital as a problem to support Precision Parts whatsoever.

I'm not – I'm sure it's available, I just wanted to know how much would you invest in it? I mean, I guess, how do we think about inventory turns here?

This is Mike Jackson. So the return on AutoNation parts for invested capital and for scale and logistics, the returns are extremely compelling and the way to think about it is that the USA stores are personification of the brand extension strategy, but this is being fully implemented across our franchise stores. So our ability to lower our reconditioning cost is not just at the USA stores, it's at every AutoNation franchise dealership, because all these parts will be used for reconditioning. Now if it is a certified CPO unit from a manufacturer, of course then we use the OEM parts. But for volume pre-owned across the enterprise, we will be flowing in these AutoNation parts. So the impact is significant.

Okay. All right, thank you.

Thank you. Our next question will be from the line of David Lim from Wells Fargo. Sir, your line is now open.

Hi. Good morning. Can you – I just wanted to understand the centralized pricing and correct me if I'm wrong. So do you guys like do One Price for every single geography separately, but from a singular area, in other words is – like a Toyota Camry 2015, is that going to be of the same price regardless of geography or is it tailored to what is acceptable by geography? Does it make any sense?

Yeah. This is Lance. So we look at specifically how vehicles are sold and priced in the competitive market that we're in. So you may have a different price on a car from one coast to another coast. But we're a competitive in the markets that we represent.

So understanding that, I'm trying to understand what exactly happened from your whole One Price algorithm, was it more on a computer side or was it – can you just parse that out just a little bit more, so we sort of understand where it was and where it's going to go?

So I think it was more in the implementation that wasn't computer or algorithm or anything like that. It was just people communicating well on and on the particular vehicles and what they look – we think they're worth...

Oh, okay.

and how we price them.

Got you. Got you. And then, Mike, I know that you guys are putting in a fair amount of investment in AutoNation USA, and all these other initiatives. Obviously, you're probably making little to no money on new vehicles, but have you ever thought about maybe going overseas, it seems like some of the opportunities there seem to be fairly lucrative, you guys could get probably a very good deal on dealer groups. Any thoughts there?

We are strictly focused on the U.S. It took – I think, we're uniquely positioned in the U.S. We're the only one that's built a coast to coast brand. We're the only one with this level of scale in the U.S. which gives us tremendous purchasing power on the parts side, and on the accessories side that we can really go directly to suppliers, and specify parts that meet our needs, and meet our customer expectations and brand them, because of our size. So, that's diluting that scale outside the U.S. to me does not make sense. So we have a very unique opportunity in front of us to really build something that no one else is even trying to follow. A brand coast to coast with a massive customer care business repairing over 4 million cars a year, nobody even comes close to that in the United States. And now leveraging that scale and that brand to bring better prices and value to our customers and better profits for us. And I don't want a distraction of going overseas with all the issues that comes with it. I'm very focused on this unique opportunity that we've created with leveraging our brand, scale, and technology here in the U.S.

Got you. And then, I wanted to circle back on one comment that you made. You said I think given up on the OEMs, so then what is now your approach to new vehicles, are you going to focus on just pushing volume or how should we think about that? I mean the new vehicle same-store sales over the last several quarters have turned negative for you guys. Your comment, does that mean that you guys were at an inflection where you are going to push more volume going forward? Thank you.

We're sort of running with the market if you adjust for our overweighting in Florida and Texas. And if I look at July sales, for instance, we're down 2% on new vehicle sales approximately and I think that's probably about where retail is in the U.S. and we have about a 6% increase in pre-owned. So, I think we're finding the right line. My point is that the front-end margins on new vehicles for us is down around 5%, there is no chance it's going back up to what it was five, 10 years ago so you sort of accept it. Our cost are 4% to 5%, we'll do everything we can to squeeze any cost out we can, but it's a complicated transaction that the manufacturer is doing nothing to simplify. The programs have almost overwhelming complexity that we have to contend with, there is no chance to One Price in new vehicles. So, we will run the play for the manufacturers, that's how they want to sell their vehicles, and we will take our share of the pie. The cost to increase share in new vehicles would be astronomical on the pricing side, so we'll just try to fight a First World War trench warfare on the margin, try to hold it as best we can where it is and hold our place on new vehicles, and that's a responsibility and obligation we have in the franchise system with our manufacturers and that's the way they want to run it. However, for our company and our talent and our shareholders, we also have a responsibility to grow this business profitably and there I have to look at areas where we have much greater influence over what happens and we can really leverage our brand, our scale, and our technology to grow a business independent from what's going on in the OEM dominated new vehicle business, and hence that's our brand extension strategy. And I think the headwinds from the new vehicle business are here to stay and that's a reality that we have accepted. And hence now we felt this day was coming, so we built the brand, have our scale, invested in our technology, and we think we have found the way to unlock opportunity for the future that we have more control over.

Oh, one quick follow-up and the question that I always ask, SAAR. What are you thinking on 2018 given what you've seen so far in 2017? Thank you so much.

I think it will be high 16 million, towards 17 million.

Thank you.

Thank you. Our next question will be from the line of James Albertine from Consumer Edge. Sir, your line is now open.

Great. Thank you. And good morning, everyone.

Good morning.

I wanted to ask if I may on the F&I side, continuing to see some strong growth there. You're well above $1,600 a unit, so congratulations on that result, but if we could maybe dig in a little deeper to dimension what's driving that, I suspect just given that lease penetration is down across the industry that that could be a benefit, but wanted to understand maybe the components of F&I that are helping you drive to that growth year-over-year?

Lance, do you want to take that, please.

Sure. I think our performance, particularly on the new car side improved in the quarter on CFS and we continue to do well with our protection product, so nothing has really changed. I think that we're doing a better job on our new vehicles and our protection products, we're penetrating the market well. So I think on the new vehicles, we'll continue to perform well. The mix, obviously, with used increasing more than new is increasing will affect our overall CFS margins as there is a difference of few hundred dollars between the new vehicle CFS margins and used CFS.

And I would point out that CFS products was our first brand extension (34:39) and that gave us the confidence that customers would embrace AutoNation branded products.

Very good. Appreciate that color. And just, there is no shortage of headlines suggesting that there are credit issues out broadly in the U.S. auto market. I want to get your opinion on that. Are there any issues with respect to credit availability or credit performance from where you sit today?

Absolutely not, see no issues. Of course, you're referring to Wells Fargo, which has raised its FICO score that it'll accept to something like 720. So obviously when a finance institution makes that decision, for whatever reason, they're going to lose a tremendous amount of business, not only the business below the line that they've cut, but we will shift business to other lenders who will buy broadly. If your strategy is just to skim the cream, it's going to be a problem, we need a broad relationship with lenders and have outstanding relationships with lenders who buy on a broad basis. We have observed certain characters who push too hard and too loose in subprime, who will pay a price for it. But it's not systemic issue with us and we have very professional subprime lenders that we work with that there are no issues.

Excellent. If I could sneak one last one in, your new vehicle inventory carrying benefit, it's down a little bit in the third quarter – I'm sorry, in the second quarter of this year, relative to last year. Just given all the comments you've had with respect to your relationship with OEMs and broadly the incentive environment, what's your outlook for that carrying benefit and is there a risk that turns negative sometime in the near future? Thanks

I can let Cheryl answer that. So listen, I've embraced – we're embracing the manufacturer on the new vehicle side, we're going to run their play. I'm not pushing back anymore, this is the way you want to sell cars, we will run the play. So our relationships are better than ever. We buy tons of vehicles and we sell them with the programs that they've launched. So we're running the manufacturer play. So I don't see anything coming in that direction that's an issue. On the other hand, though, if as an auto retailer, you merely run the manufacturer play in this environment, you're going to be stuck as far as growing the business and growing your profitability. I assure you of that. You're going to have to a find new way and, hence, our brand extension strategy. So it's sort of a win-win strategy. We're going to give the manufacturers what they want, namely, move a ton of new vehicles the way they want to sell them. And – but on the other hand, in fields of business which are our area of expertise and are not dominated by the manufacturer, we're going to go new ways. So, Cheryl, if you want to talk about that specific question you can.

Yeah. Jamie, so what I would say is, year-over-year, the net floorplan was a $6.5 million decline, that was anticipated. So, I'd say, the biggest driver is really interest rate. So if you think about the interest rate environment, we have been modeling and we'll continue to model lower net floorplan on a go-forward basis. So, I'd say, that's expected in there. I think on inventory levels, you have some manufacturers who are heavy right now. They plan to soften down and trim production for planned closures. So, I'd say, we'll continue to keep an eye on aggregate inventory levels, but, on balance, it's something that several years ago, we would have told you that there is a point at which we're going to start seeing some compression there and we have to have plans around, and that's why brand extension is important to contribute the growth, particularly to contribute the growth in a high – the growth in a high flow-through area like customer care, so we like the flow-through of the customer care brand attributes and that's one of the plans that we have in place to help offset expected increases in interest rates on the floorplan side.

Well, thank you very much. It's very helpful. And best of luck in the next quarter.

Thanks, Jaime.

Thank you.

Thank you. Our next question will be from the line of John Murphy of Bank of America. Sir, your line is now open.

Good morning, guys. Just wanted to ask sort of a first question. I mean the current environment is kind of being described as okay and, in some cases, relatively negatively based on its direction of sales. But I'm just curious, I mean as you're seeing consumers walking to your showroom, is it more challenging to get them into a new vehicle, and are you having to contribute a bit more in the form of gross to get the deal done. And I'm just trying to understand really, Mike, you obviously have a great statistically significant view of the market, 2% of the market. I'm just curious what your view of the market really is right now. I know you've kind of talked about this a bit. But it seems it's a little bit more challenging than most people are seeing. I'm just curious at the store level, in each of your stores, is it harder to get these deals done?

I would answer it this way. If I step back and say, okay, what's the health of the consumer and what's their appetite to buy vehicles, I think obviously they're willing to buy trucks, 65% of the mix is probably where we're headed, and that's very profitable for the manufacturers, but trucks are more expensive and they look around and see we have these unprecedented lease returns that are very attractive vehicles at a very different price point. So, if I was to say what is the size of a marketplace that I defined as new to nearly new, the marketplace is probably flat to slightly up. So, there is a shift underway. Now, my point is, you can't bring back to the marketplace 3.5 million, 4 million; ultimately 4.5 million vehicles off lease, that are nearly new, that wouldn't normally be coming back on this cycle in these volumes and not impact the new vehicle business, it's just unreasonable to think that consumers who are so price-savvy won't be attracted to these vehicles. Now as far as the pressure on margins, well, the manufacturers run high inventories, we have four million finished vehicles, $100 billion of finished goods, even though everybody has been talking about this market plateauing, I first started talking about it in the beginning of 2015, the manufacturers really haven't moderated production. So inventories in the marketplace are high, and then they put out very aggressive incentive programs where every dealer, every store is given a price volume target that leads to all kinds of irrational multi-tier pricing behavior. That was difficult to contend with and the consequence of all that is there is pressure on front-end margin between high inventories and the types of programs that the manufacturers run. So my conclusion is, I accept that's the new vehicle market. I see opportunity where pre-owned, a much larger market, is going to grow in the future whereas there's going to be slight decline in the new. And since the pre-owned business is an arbitrage between what I – what and how I acquire and how I recondition, and my selling process means what kind of price I can get, I can manage that front-end gross to a very respectable number. That is within my control. So we will have headwinds in new, I will – our goal is to ultimately overcome those headwinds with pre-owned and be growing our customer care business with all our brand extensions at a very healthy rate. That's our new strategy.

Okay. And if I could just follow-up, I mean if we were to rewind the clock and look at sort of 2002, 2003, when there was sort of a not a small wave of vehicles coming off lease, this will be more of a tsunami, but the automakers cut price and raised incentives dramatically to support new vehicle volumes. I mean are you getting the inklings that that is starting to happen right now and kind of, ironically, could that be very good for your business? Meaning that you would sell a whole lot more new vehicles and you would still have all these vehicles coming off leasing for you to see a whole lot more used vehicles, I mean is that kind of what you think might be the opportunity, I mean it could be not so great for the automakers, but it could be a heyday for you.

Now, first, compared to 2002, I think the automakers are in a very different place, their house is in order, good balance – much better balance on the cost basis, much better products, they've brought into alignment with what people want to buy and the mix is 65% trucks. If this mix was 65% cars, I mean they're in serious trouble, but gas is cheap and it's going to stay cheap. So you can't underestimate how healthy the profitability of the OEMs is going to be compared to where the situation was in 2002 and 2003, and by 2005, 2006, 2007, we were calling out that this is going to be a very ugly ending. I'm not saying that at this time, not at all. I think it's a very different scenario. Now, will they find a better balance between supply and demand? I hope so, but that remains to be seen. But I don't think it's comparable to what happened back in 2002, 2003 culminating in the disastrous 2008 and 2009 (45:22).

Okay. And then just lastly on acquisitions, I mean it looks like you guys are focusing a little bit more on the Premium Lux side with what you've done and sort of the open points you've received. I mean you see some sort of sense of relief or a better segment there that you think would be more sustainable for the new vehicle, the new vehicle business over time?

We look at every acquisition on its own merits and these acquisitions either a part of brand extension or fit into building this Premium Luxury row across Delray Beach and protecting that on the South with combining this Alpine Jaguar store with a Land Rover store we already had there, which is in alignment with Land Rover-Jags overall strategy. As far as the acquisition market, I'm not sure sellers have come to terms with the fact that the new vehicle business is, as we just described at length and have to factor that into the valuation of what they're selling.

Okay. Great. Thank you very much.

Thank you. Our next question will be from the line of Rick Nelson from Stephens. Sir, your line is now open.

Thanks and good morning.

Good morning, Rick.

Mike, can you remind us of the testing that was done with One Price before you rolled it out across the country?

Well, we started in the beginning of 2016 and moved into certain markets and implemented it. We started on the West Coast. So the West Coast is our most mature market and our first market. So Lance you're ideal to talk about how you brought it into the West Coast.

Yeah. Rick, so we were the – we rolled it out at the very beginning on our coast, so it's started with training our sales associates, it was a collaboration with our centralized team, a lot of focus on change management with – because it is a significant change for our industry and for our associates to do this. So a lot of focus on those areas and a very strong communications with our centralized appraising and pricing team. And then – and it just worked out, it wasn't smooth – and but we're through it in the West, and it's performing very well. And we expect the Central and Eastern regions to follow suit as they become more mature in this process.

Got you. And that centralized pricing appraisal model, is that a system that AutoNation created or was that kind of purchased?

Lance?

No, it's not a proprietary system, it's a system that shows us basically what the market is out there on different vehicles, it also gives us a lots of other data, MMR auction values, all those types of things. So it's not proprietary to us, it's something that we use, but it's – does that answers your question?

Yes. So, at the West Coast, which is where you've started, those stores performed as expected in 2Q and it's the Central and the Eastern regions that need some help?

That's basically correct, Rick.

Got you. Okay. Thanks a lot, and good luck.

Thank you.

Thank you. Our next question will be from the line of Brett Hoselton from KeyBanc. Sir, your line is now open.

Good morning. Thank you very much. I was wondering if you could help us over the next few quarters model out or think about the impact of some of these initiatives that seems like the AutoNation USA stores might be the greatest swing in terms of the financial impact. But can you talk about the impact here in the quarter, and then how you see it progressing over the next, let's say, four quarters?

Well, I would describe it this way. I think as far as financial impact for the rest of this year, it's mainly the cost of brand extension across everything we've discussed. So, you have most of the cost without much gross profit to counterbalance it. If I look at 2018, the big benefit comes from the customer care business and that's everything from collision to parts to accessories and we've called out, that's $100 million incremental lift in gross profit on the customer care side of the business. We think we will grow our pre-owned business next year, which is a combination of our ability to acquire vehicles at an attractive price, recondition them at an attractive price and sell them at an attractive price, and that's across the entire enterprise of which the USA stores are a small part. So actually the operating situation at the USA stores for the next couple of years is relatively minor compared to everything else that's going on in the existing business.

And that leads into my second question, which is, in terms of your core used vehicle operations, what gives you confidence that you're going to be able to improve the performance of that business as you move from this year into next year?

We're absolutely thrilled with the customer response to One Price. It's attracted tremendous traffic, new buyers, and they really express how much they like the process. We see our We'll Buy Your Car, which will be a very attractive source of vehicles, ramping up very nicely. We know we're going to have parts at a much more attractive price. So, I have good consumer response, building good sourcing to attract cars, good capability to recondition on a lower cost basis, that gives me confidence we can grow the business profitably.

Okay. Thank you very much, Mike.

Thank you.

Thank you. Our next question will be from the line of Brian Sponheimer from Gabelli. Sir, your line is now open. Brian C. Sponheimer - Gabelli & Co.: Hi. Good morning.

Good morning. Brian C. Sponheimer - Gabelli & Co.: If we're thinking about the One Price mature markets on the West Coast, how does the gross profit compare to what you're really seeing now? And I guess the broader question is, Mike, looking ahead, do you believe that on a gross margin basis, your used vehicle margins are going to be structurally lower than they have been during the negotiated price period?

Structurally lower, no. We think – our goal is to get back to something close to what we had in the negotiated world as a first step. And we think we can get there by the end of the year. Brian C. Sponheimer - Gabelli & Co.: Okay. And if we're thinking about the $100 million of incremental profit next year, what's your sense as to how that sequences in over the course of the year, how much do you think is back weighted and does that mean that there is a significant bump again in 2019?

It will be noticeable in the first quarter of 2018. And it's very beneficial over the next five years. Brian C. Sponheimer - Gabelli & Co.: All right. Well, I'll certainly wish you luck.

We expect to be able to grow, increase our customer care gross profit above a base rate due to this branding initiatives. It's a multi-year benefit. Brian C. Sponheimer - Gabelli & Co.: Thank you.

Thank you. Our next question will be from the line of David Tamberrino from Goldman Sachs. Sir, your line is now open. David Tamberrino - Goldman Sachs & Co. LLC: Great. Thank you. I wanted to circle back on a couple of the different threads earlier, we're talking about the current U.S. SAAR environment, OEM discipline, and the inventories you have out on the lot today. In the past, Mike, you've kind of given us some color as to what you've seen from different OEMs, if any of them were acting more irrationally than their peers. Wondering if you're still thinking, one, for this year above a 17 million SAAR from a U.S. perspective, given where production schedules are coming into the back half of the year? Two, if you are seeing any incremental stairstep incentive programs by any particular OEM one way or the other? And then, three, if it's – if it isn't – if it's just more selective in terms of where the OEM incentives are going in terms of a passenger car versus a pick-up truck versus the crossovers and the utilities?

Yeah, I see the year coming in right around 17 million, plus or minus a little bit. I've said in the past, and I still believe that in my judgment incentives have hit the wall of diminishing return, in that once the manufacturer incentive breaks into double-digits, once leasing breaks over 30%, you are at the limits of any rational return for the next incremental unit, that the next discount basically comes off the resale value of the car. And, therefore, you really haven't done anything. So, if you have a 5% discount, and you go to 6%, that's meaningful to a customer. When you're at 10%, and you go to 11%, it doesn't mean as much, you don't get the same bang for your buck. And, I think we're at that line. So, I expect, or hope that manufacturers will adjust production to accepting where this market has plateaued, which can still be a very good market profitability for them, and reasonable environment for us. So we will see. The next months will really tell the tale. David Tamberrino - Goldman Sachs & Co. LLC: Understood. So, within that, are we seeing any particular OEMs really trying to drive it further and gain market share or is it just, do you think they've found religion and are acting more disciplined now that they've realized that's an incremental incentive dollar?

I think... David Tamberrino - Goldman Sachs & Co. LLC: I mean at the cost of profitability...

This is an opinion, I think they have found religion. GM is probably a special case at the moment with the amount of changeover they have to go through in the second half of the year. So we expect their inventories to be better next year, but it was really difficult in the first half of this year with GM. Same with Chrysler, very difficult with the inventories, so we need to see adjustments there. Ford is doing a much better job this year. And the Asians are in reasonably good shape so as the Germans. David Tamberrino - Goldman Sachs & Co. LLC: Got it. And then just my last question on Florida, I think it sequentially worsened from the first quarter to the second quarter, you mentioned it was stabilizing. When you say stabilizing, is it sequentially improving or is the headwinds staying the same in a year-over-year fashion?

No, it looks like the second quarter was a valley that, for whatever reason, seems to have moved into the rear-view mirror, in which case I'm not going to lose too much sleep trying to pin down exactly what it was. That's our sense at the moment. David Tamberrino - Goldman Sachs & Co. LLC: Okay. I appreciate the time. Thank you.

Thank you. Our next question will be from the line of Bill Armstrong from C.L. King & Associates. Sir, your line is now open. William R. Armstrong - C.L. King & Associates, Inc.: Good morning, everyone. Just a couple of follow-ups here. You talked about the issues with the One Price having an impact on your gross margins for used. Was there also any impact holding over from the cars you had on recall hold or is that pretty much behind you by the time we got into Q2?

By the time we got into Q2, I can't say any impact whatsoever from recall. The last major brand that we had on retail hold was Mercedes-Benz where I think, Lance, we had 1,800 or something like that?

No, we're down under 2% of our used cars.

Yeah. But as of April 1, with Mercedes-Benz, I think we had 1,500, 1,600, but those parts are now coming in, that's moving behind us. So recall is not an issue. William R. Armstrong - C.L. King & Associates, Inc.: Okay.

This has nothing to do with recall. William R. Armstrong - C.L. King & Associates, Inc.: Got it. Okay. And then, in response to an earlier question, I thought I heard you say that, in July your new unit sales were down 2%, did I hear that right?

That's correct. William R. Armstrong - C.L. King & Associates, Inc.: So that would imply just based on what the OEMs reported yesterday that maybe you gain some market share, is that a fair conclusion?

No, it's not. I think that July sales figure, I think when all the dust settles and you can get the detail, but this is my gut call, we'll say that there was some volatility around fleet deliveries. I think the new – I don't think anything unusual happened in the new vehicle market in the month of July at retail. So I expect the retail market to be off 1% to 2% for the industry, we were down 2%. We still had challenges in Texas, but Florida was okay. Therefore, we're much closer to the industry number. So that's how I see it. We did not significantly outperform in July. I simply think the headline number of minus 7% has a lot of fleet noise in it. I think the core retail number for the industry is going to be minus 1%, minus 2% for July. William R. Armstrong - C.L. King & Associates, Inc.: Okay, got it. Thank you.

Thank you. Back to you, speakers, you may now proceed.

So, thank you, everyone, for joining the call today. Appreciate all the time.

Thank you. This concludes today's conference. Thank you all for joining.